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May 19 (Reuters) - (The following statement was released by the rating agency)
This announcement corrects the version published on 12 May 2014, clarifying that Total SA did not participate in the rating process.
Fitch Ratings-Moscow/London-12 May 2014: Fitch Ratings has revised the Outlook on Total SA's Long-term Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at 'AA'. A full list of rating actions is at the end of this release.
The Negative Outlook reflects higher completion risks associated with Total's new upstream projects and the potential that funds from operations (FFO) adjusted net leverage may stay above 1.5x in the medium term. Total's production (excluding equity affiliates) declined in 2013 for the third year in a row amid increased capital intensity and moderately higher leverage. Total expects to boost its production by 2015, thanks to new projects scheduled to come on-stream in 2014-2015, as well as ramp-ups of already producing projects and reducing decline rates. For the Outlook to be revised back to Stable, Total will need to achieve its upstream production targets and demonstrate that its ambitious USD50bn (EUR37.5bn) capex allocated for 2013-2014 is starting to pay off.
Total is a leading global integrated oil and gas company with 2013 production of 1.55 million barrels of oil equivalent per day (mmbbl/d) (excluding equity affiliates) and strong positions in deepwater offshore and liquefied natural gas (LNG) production.
KEY RATING DRIVERS
Falling Upstream Output
In 2013, Total's upstream production (excluding equity affiliates) dropped by 5% from 2012 to 1.55mmboe/d, close to the levels of Eni (A+/Negative, 1.50mmboe/d) and ConocoPhilips (A/Stable, 1.41mmboe/d), and below that of Royal Dutch Shell (RDS, AA/Stable, 2.37mmboe/d). In 2010-2013, Total's upstream output reduced down by a CAGR of 6% (excluding equity affiliates), due to a natural decline of mature fields, including offshore fields in Norway, a temporary shutdown of several fields due to a gas leak in the North Sea in 2012, increased oil theft in Nigeria and disposal of certain assets. The company expects to boost its production by more than 10% by 2015 (including equity affiliates), mainly due to new projects coming on-stream in 2013-2015, including Ekofisk South in Norway, Laggan-Tormore in the UK, OFON2 in Nigeria and CLOV in Angola. Total's failure to increase upstream production in 2014-2015 by at least 2% annually (excluding equity affiliates) could result in a downgrade.
Although higher production from assets in which Total has minority (equity) stakes offsets falling production of its consolidated subsidiaries, we do not view this as equivalent substitution as we put more emphasis on consolidated production. This is because the cash flows generated by equity affiliates may not be readily available to service debt at the parent's level.
Large Scale of Operations
Total is one of the world's leading hydrocarbon producers with strong expertise in production from deepwater offshore fields and a large presence in LNG. It has sizable and geographically diversified reserves and strong proved reserves life of 14 years, slightly above that of RDS (12 years). However, its organic reserve replacement ratio calculated by Fitch (excluding equity affiliates) was below 100% in 2012-2013, meaning the company is facing difficulties with replenishing its proved reserves, despite increased exploration budgets.
Downstream Challenges Continue
Total is restructuring its Refining & Chemicals segment to boost its profitability by decreasing exposure to European markets and developing refining and petrochemicals businesses, including outside Europe. In 2013 Total launched 400 thousand barrels per day (mbbl/d) Satorp refinery in Saudi Arabia operated by its joint venture (JV) with Saudi Aramco. It has also completed the upgrade of its US-based refinery and is expanding its successful petrochemical projects in Qatar and South Korea, as well as is proceeding with the Antwerp platform modernization. Nonetheless, we expect that the segment's profitability will continue to depend on the European refining margins, as most new projects are operated as JV or Total only has a minority stake in them and hence their cash flows are not immediately available to service Total's debt.
Weakening But Still Solid Financial Profile
Total's financial profile slightly weakened in 2013, although it is still commensurate with the 'AA' category. At end-13, its FFO adjusted net leverage was 1.5x, up from 1.2x in 2012, mainly due to lower operating cash flows and higher off-balance sheet obligations. Its FFO interest cover remained healthy at above 30x. In 2013 Total had negative free cash flow (FCF) of EUR6bn, which was partially offset by divestments. We expect that FCF could remain negative if Total does not significantly increase its upstream output in 2014-2015. For 2014-2016, we forecast that Total's FFO adjusted net leverage will stay within the 1.5x-2x range under our conservative Brent oil price deck (USD96/bbl in 2014, USD91/bbl in 2015 and USD85/bbl in 2016) and our base rating case assumptions - relatively stable upstream production, declining capex, unchanged 50% dividend pay-out and EUR1.5bn divestments in 2014.
RATING SENSITIVITIES
Outlook Stabilisation:
- Rising upstream production by at least 2% p.a. and reserve replacement rates above 100% in 2014-2015.
- Positive FCF on a sustained basis.
- FFO adjusted net leverage within the range of 1x-1.5x on a sustained basis.
Negative rating action (downgrade to 'AA-'):
- Stagnating or marginally positive upstream production (excluding equity affiliates) in 2014-2015 despite intensified capex.
- Organic reserve replacement ratios below 100% in 2014-2015.
- FFO adjusted net leverage within the range of 1.5x-2x on a sustained basis.
Negative rating action (downgrade to 'A+', which we currently assess as unlikely):
- Upstream production continues to fall by more than 2% p.a. over several consecutive periods.
- FFO adjusted net leverage exceeds 2x on a sustained basis.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity, Balanced Repayments
At end-2013 Total's short-term debt of EUR8.1bn was fully covered by EUR14.6bn in cash. Total has healthy access to international debt markets and should be able to refinance upcoming maturities when needed. Total's debt is mainly made up of bonds and its maturities are well balanced, with 55% of total debt falling due after 2016.
RATING ACTIONS
Total SA
Long-term IDR: affirmed at 'AA'; Outlook revised to Negative from Stable
Total Capital SA
Senior unsecured debt: affirmed at 'AA'
Total Capital International SA
Senior unsecured debt: affirmed at 'AA'
Total Capital Canada Ltd.
Senior unsecured debt: affirmed at 'AA'
